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Buyers unfazed by closed-end quirks

Discounts and gearing are not putting investors off investment trusts. Why is this message so important? It’s important because it doesn’t match what is being heard elsewhere.

The general consensus among the industry is that there is reluctance to recommend investment trusts because of their complexities and a fear that investors are, or will be, put off by these features. Gearing, the mechanism through which investment trusts can borrow to buy more assets, is a case in point. So are the discounts at which trusts’ shares can trade to the net value of their assets. But the results of Morningstar’s latest survey show very clearly that this isn’t the case among private investors managing their own portfolios.

More than one-fifth of participants were looking to learn more about investment trusts and were searching specifically for education. An overwhelming 89 per cent of users said they were interested in investing in closed-end funds in the future. That suggests that private investors are well informed of the merits of investment trusts, even if some want help understanding the finer detail.

IT nuances

Approximately half of the participants cited discounts as an important part of their decision, but for the other half, it had little or no importance. Discounts can play a key role in some investment decisions, but that doesn’t mean they have to be a deterrent.

The need for a formal mechanism to control trusts’ discounts was low, with less than 25 per cent of respondents citing it as important. Clear guidance on the board’s discount policy and when/how it will act – with demonstrable evidence – has as much value as a formal discount target, if not more.

Two-thirds of participants stated that gearing was of little or no importance. It seems investors are less fearful of gearing than is often perceived to be the case. The AIC has campaigned hard with its membership to give clear guidance on funds’ gearing policies. It may be that this has helped to allay investors’ fears. Or it may be simply that closed-end fund investors recognise gearing as a benefit of the legal structure which has added value over the long term when used well. Either way, it isn’t as great a concern as some may think.

More than half of respondents, however, cited a regular flow of dividends as important to them. Only 15 per cent said this had little or no importance. Nearly half of the participants wanted access to alternative asset classes through their investment trust holdings, such as property and private equity.

This is encouraging as these are areas in which the closed-end fund structure works well for investors. In a post-RDR world, advisers are more likely to recommend these types of funds than some of the generalist equity funds as they offer something a little different that is not easily accessible elsewhere.